Jiangxi Ganyue ExpresswayLTD (SHSE:600269) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jiangxi Ganyue Expressway CO.,LTD. (SHSE:600269) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangxi Ganyue ExpresswayLTD

What Is Jiangxi Ganyue ExpresswayLTD's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangxi Ganyue ExpresswayLTD had debt of CN¥12.3b, up from CN¥10.0b in one year. On the flip side, it has CN¥4.67b in cash leading to net debt of about CN¥7.66b.

How Strong Is Jiangxi Ganyue ExpresswayLTD's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Ganyue ExpresswayLTD had liabilities of CN¥10.7b falling due within a year, and liabilities of CN¥5.34b due beyond that. Offsetting these obligations, it had cash of CN¥4.67b as well as receivables valued at CN¥1.41b due within 12 months. So its liabilities total CN¥9.97b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥11.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt to EBITDA of 2.6 Jiangxi Ganyue ExpresswayLTD has a fairly noticeable amount of debt. But the high interest coverage of 7.7 suggests it can easily service that debt. One way Jiangxi Ganyue ExpresswayLTD could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 15%, as it did over the last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangxi Ganyue ExpresswayLTD will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Jiangxi Ganyue ExpresswayLTD produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Jiangxi Ganyue ExpresswayLTD's conversion of EBIT to free cash flow was a real positive on this analysis, as was its EBIT growth rate. Having said that, its level of total liabilities somewhat sensitizes us to potential future risks to the balance sheet. It's also worth noting that Jiangxi Ganyue ExpresswayLTD is in the Infrastructure industry, which is often considered to be quite defensive. When we consider all the elements mentioned above, it seems to us that Jiangxi Ganyue ExpresswayLTD is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Jiangxi Ganyue ExpresswayLTD (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.